Litigation Alert: Settlement Agreements Executed During Mediation Are Only Admissible If They Include Clear Language Demonstrating the Parties' Intent to be Bound

December 19, 2006

Publication Profile

On December 14, 2006, the California Supreme Court ruled
in Fair v. Bakhtiari, No. S129220, ___ Cal.4th ___ (Dec.
14, 2006), that under California Evidence Code section
1123(b), parties who mediated their dispute and signed a
settlement memorandum did not clearly demonstrate their
intent that the memorandum be enforceable, even though
it contained an arbitration clause. As a result, the terms
of the settlement memorandum, including the arbitration
clause, were held to be unenforceable by the Court.

Practical Impact

Settlement agreements produced as a result of mediation
are not admissible unless they indicate on their face
whether or not the parties intended that the agreement be
binding or otherwise enforceable. Although the California
Legislature in enacting Evidence Code section 1123(b) did
not require parties in mediation use a formulaic phrase,
there must be some writing signed by the parties that
indicates the agreement is enforceable and binding. Terms
related to the eventual enforcement of the settlement
agreement, like arbitration or forum selection clauses,
are inadequate. Failing to clearly express the parties'
intent will render the agreement inadmissible, and hence
unenforceable, under Evidence Code sections 1119 and
1123(b).

Background of the Case

Plaintiff R. Thomas Fair sued a group of former business
partners and his ex-wife for wrongfully excluding him from
a real estate deal. After filing suit, the parties mediated the
dispute for two days and drafted a signed memorandum
of settlement terms. The memorandum was handwritten,
appeared to resolve most of the dispute, and contained
an arbitration provision. However, the settlement
memorandum did not address a variety of complicated
tax issues. After the mediation the parties exchanged a formalized settlement and release agreement while also
continuing negotiations on the tax issues. During a case
management conference counsel for one of the defendants
told the court that the parties had reached a settlement
agreement, but were still negotiating the outstanding tax
issues.

The negotiations then broke down and counsel for the
defendants informed the court that an agreement had not
been reached and that the case should proceed before the
court. Plaintiff then moved to compel arbitration under
the settlement memorandum. Defendants opposed, citing
that the memorandum was not admissible evidence as it
was a document prepared during the course of mediation
and therefore should be excluded under Evidence Code
section 1119. California Evidence Code section 1119
protects the confidentiality of documents prepared for,
used in, or created during mediation sessions by barring
their admission into evidence, discovery or compelled
disclosure. This policy is intended to promote frank
discussions during mediation without penalizing parties if
it ultimately fails.

Plaintiff's position was that the inclusion of the arbitration
clause indicated the parties' intent to be bound by its
terms, thereby falling within the admissibility exception
of Evidence Code section 1123(b). Evidence Code section
1123(b) carves out an exception to this policy for settlement
agreements drafted during mediation, signed by the
parties, which contain a clear indication of the parties'
intent to be bound by the terms of the agreement.

While the trial court agreed with the defendants, the
California Court of Appeal found the inclusion of an
arbitration provision allowing for "[a]ny and all disputes [to
be] subject to JAMS [] arbitration service" demonstrated the
parties' intent to be bound by the agreement. The Court of Appeal subsequently found the memorandum reflected a
valid arbitration agreement.

The California Supreme Court reversed as the inclusion
of the arbitration provision did not amount to a clear
indication of the parties' intent. To give it such effect
would require courts to infer from the parties' language
and subsequent behavior, including the statements made
at the case management conference, whether or not they
intended the settlement memorandum to be enforceable.
While the Court refrained from providing "magic words" for
use in enforceable settlement agreements arising out of
mediation, it held that "arbitration clauses, forum selection
clauses, choice of law provisions, terms contemplating
remedies for breach, and similar commonly employed
enforcement provisions typically negotiated in settlement
discussions" were not sufficient indicators, without more
definitive language, as to the parties' intent under section
Evidence Code section 1123(b).

This update is intended by Fenwick & West LLP to summarize
recent developments in the law. It is not intended, and should
not be regarded, as legal advice. Readers who have particular
questions about these issues should seek advice of counsel.